The Social Market Foundation (SMF) has warned that the UK government must act urgently to tackle a growing pensions crisis among the self-employed.
The think tank is calling for targeted reforms, including allowing HMRC and financial services firms to deliver personalised “nudges” encouraging retirement saving, in a bid to close the widening gap between employees and self-employed workers.
The SMF’s recommendations are based on research commissioned by digital bank Monzo, which surveyed 1,000 self-employed workers in the UK. The findings come as the government launches a new Pensions Commission to address systemic issues in the current pensions framework.
Self-employed workers, along with lower earners and ethnic minorities, are considered among the most at risk of inadequate retirement savings, with more than 3 million not contributing to a pension at all.
While self-employment now represents a significant portion of the UK economy, pensions policy has not kept pace. Only 20% of self-employed workers are enrolled in a pension scheme, compared to 78% of employees. The difference is also reflected in contribution patterns — whereas employees contribute a percentage of their earnings each month, meaning contributions grow with income, 31% of self-employed savers pay in the same fixed amount each month, and 30% contribute less often than once a month. A further 10% add funds less than once a year.
The research shows affordability is not the sole barrier to saving. Even when income is equal, employees are more likely to save for retirement. Nearly two-thirds of self-employed respondents admitted they either “don’t really understand” pensions or have only “a basic understanding”. Many prefer to hold any spare cash in instant-access savings accounts rather than locking it away in long-term pension schemes.
The SMF highlights that the absence of an auto-enrolment mechanism for self-employed workers has sharply widened the savings gap. Although some self-employed individuals seek advice from financial planners, this is often limited to higher earners. For others, generic financial guidance can be too complex or insufficiently tailored to encourage action.
The think tank believes reforms to the “advice/guidance” boundary, including enabling “Targeted Support”, will be critical. Its proposals include short-term measures to fast-track FCA approvals for targeted financial support, medium-term steps to incorporate opt-out interventions into customer engagement, and long-term integration of pension “nudges” into HMRC’s self-assessment process — including active choice or opt-out auto-enrolment options.
Social Market Foundation researcher John Asthana Gibson said, “The low rates of pensions saving by self-employed workers should be a huge cause for concern for policymakers. If trends continue, large numbers of Britain’s entrepreneurs will struggle to live to the standards they rightly expect in retirement.
“It’s simply untenable for the government to continue to overlook this problem. We should build on the success of auto-enrolment for employees and ensure that people in this crucial but often forgotten part of the labour force are encouraged to sufficiently save for their retirement.”
Monzo group policy director James Shafe said, “We welcome the Government’s Pensions Review and its focus on ensuring everyone saves enough for retirement. Crucially, this must tackle the widening gap between the employees and the self-employed. The 4 million self-employed workers in the UK are the backbone of our economy, yet they’re at most risk of being left behind when it comes to saving for retirement. Our research shows a staggering 70% don’t believe they’re saving enough for retirement citing affordability, lack of understanding and tailored products as key barriers.
“At Monzo, we’ve seen how smart financial tools empower our 700,000+ business customers to manage their finances. That’s why we back the Social Market Foundation’s calls for reforms that would allow financial institutions to champion better retirement savings habits amongst the self-employed and help millions to secure their long-term financial future.”
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